Stock lovers blind to Europe's travails

U.S. retail sales in January were better than in December, but not nearly as strong as economists were expecting. (Andrew Burton, Getty photo)

The Valentine's Day message delivered by economic data Tuesday lacked passion. Instead of the steamy embrace economy watchers have been awaiting, the data offered a mere encouraging peck on the cheek.

Retailers in January found consumers more willing to buy than they had been in December, but not nearly as enthusiastically as economists were expecting. Small-business spirits, likewise, have warmed since the depths of the recession, but near-term confidence is subdued and down slightly from the previous month.

"Optimism is inching out of the recession levels, albeit at a snail's pace," said IHS Global Insight economist Leslie Levesque.

The National Federation of Independent Business survey of small-business owners, tracked closely because sometimes it is a canary in the coal mine, shows small businesses in a very different place than the stock market. Although the Standard & Poor's 500 has soared 7.4 percent this year, small-company owners are guarded about hiring and reluctant about making purchases. Yet, the number expecting better conditions in six months is the highest since February 2011's optimistic period.

Consumers, too, continue to lag economist expectations. Retail sales in January rose 0.4 percent, about half as much as economists had forecast. People increased spending in restaurants and at grocery stores and sporting goods stores, while holding back on the auto purchases that are crucial for the economy.

"To put their finances on a firmer footing, households still need to continue paying down debt and boosting their savings," said economist Paul Dales of Capital Economics. He thinks that's going to take a few more years.

Investors this year have been more focused on what might be than what is. They have been encouraged by a slowly improving unemployment rate of 8.5 percent and some signs that the housing market might be bottoming. Unlike last year, when investors worried about a eurozone meltdown and abandoned stocks, this year investors have looked past credit rating downgrades in European countries, including the threat this week that the U.K. could be marked down for its debt. Stock investors also seem unfazed by Greek people rioting about sharp cuts in pay and pensions, a precondition for getting aid from the rest of its eurozone partners.

The country is in a deep recession, with a 21 percent unemployment rate. Yet, the eurozone won't provide Greece help with its debts unless the Greeks accept a 22 percent reduction in the minimum wage, the elimination of 20 percent of public sector jobs and a 15 percent cutback in pensions.

On Tuesday, finance ministers canceled a Brussels meeting and said they will hold a teleconference instead to prod Greece to do more to clinch an aid package worth $170 billion. Greece needs the aid to make a bond payment on March 20, but European leaders are concerned about Greek leaders' assurances that the country will stick to austerity measures. Those cuts are expected to send Greece deeper into a recession despite a 7 percent decline already.

Greece's problems stand as a symbol to advocates of deficit cutting in the U.S. As President Barack Obama introduced his budget this week and a $1.3 trillion deficit for 2012, deficit hawks pointed to Greece and other European countries squeezed by excessive debts. They are being used as an example of how delaying too long on debt reduction can be a trap with dire consequences. The debt debate is likely to be an overhang for the stock market through the November election, with political leaders debating whether spending cuts and tax increases will weaken a fragile economy or position it for future growth.

For now, however, the U.S. and global stock markets have been on joy ride. Though individuals have remained reluctant to join in, institutions have been in the mood for taking risks. Standard & Poor's has noted that the 10 worst-performing stocks of 2011 have surged 39 percent, and investors have shunned the less risky dividend-paying stocks that appealed to risk-averse investors last year.

According to a Bank of America Merrill Lynch survey of fund managers throughout the world, professional investors have reduced the level of cash they keep as insulation against market downturns. Only a fifth think a recession is likely, and they have the strongest expectations since November 2010 for China to keep growing.

They have purchased more U.S. stocks than usual and added significant exposure to emerging markets, while avoiding Europe. Their favorite sector is technology, and they are most skeptical of bonds, as they anticipate prices falling as yields climb in an improving economy.

Although some market observers say they are squeamish because the stock market started strong last year and then dropped 17 percent in the summer and fall amid the debt-ceiling debate and economic slowing, others say the riskier bet now is U.S. Treasurys.

But if you are looking for consensus on that point, you won't find it.

Bill Gross, sometimes dubbed the "bond king" for his outstanding track record with the Pimco Total Return Fund, has upped his exposure to U.S. Treasurys to 38 percent of the fund's holdings.

Meanwhile, Warren Buffett has called bonds "dangerous" because yields are so low. BlackRock Chief Executive Larry Fink said last week that stocks are so inexpensive and bonds so potentially vulnerable that he would invest 100 percent in stocks.